Building industries: Collective action problems and institutional solutions in the development of the United States aviation industry, 1903-1938

Abstract

The following research seeks to understand the effects of competition and regulation on the development of new industries. Specifically, the issue of whether or not laissez faire markets best promote industry growth and good economic performance is investigated. This work challenges prevailing neoclassical economic assumptions regarding the efficacy of competition and unfettered markets. Drawing on lines of research in economic sociology, institutional analysis, and organizational theory, I examine how public and private regulatory agencies, including states and associations, are used by firms to facilitate cooperation and organize economic activity. Contrary to prevailing neoclassical economic assumptions, I find that regulatory institutions are not necessarily a means of denying competitors access to markets, inflating prices, and gouging consumers, but rather a means by which economic actors overcome problems of collective action. Unfettered competition, I find, thwarts the growth and development of new industries that rely upon inputs that possess "collective goods properties", specifically, technical knowledge and a legitimate reputation. This research is historical and comparative. I study the development of America's aviation industry over the period 1903--1938. This period marks the birth of the industry through its rise to early maturity. Competitive pressures to control key technologies and develop appropriate standards for the use of aircraft created problems of collective action that undermined the fledgling industry's ability to establish viable markets for its goods and services. Industry members found they were unable to manage their proprietary activities through unfettered markets and private firms and, thus, turned to more cooperative arrangements to govern their economic affairs. Producers formed an association to pool their patented technology, solve free-rider problems, pursue uniform regulatory measures for the operation of aircraft, and conduct a national campaign to make the public "airminded". Not until these institutional arrangements were established did America's aviation industry move beyond its nascent stage of development and begin to experience good economic performance.