Henry Ford did a lot for the automobile in America. What everyone knows is that he figured out how to improve manufacturing efficiency so much that the auto was transformed from a toy for the rich into an item that ordinary people could afford.
(Nothing really extraordinary in that, by the way. As Ludwig von Mises wrote in The Anti-Capitalist Mentality, “Under capitalism the common man enjoys amenities which in ages gone by were unknown and therefore inaccessible even to the richest people.”)
But very few people know that Ford had to fight against a cartel to be allowed to sell his vehicles. In this 2001 article published in The Freeman, “How Henry Ford Zapped a Licensing Monopoly,” Melvin Barger goes into the fascinating history of Ford’s legal battle against the Association of Licensed Automobile Manufacturers (ALAM).
In 1895, an inventor named George Selden had received a patent for a gasoline powered automobile. That patent was later acquired by ALAM, which then said to everyone who wanted to sell a gasoline powered car, “You must pay us royalties for the privilege of selling such vehicles and if you sell without our license, we’ll take you to court for patent infringement.”
Ford had developed his auto without any knowledge of Selden’s patent and saw no reason why he shouldn’t be free to make and sell cars without paying ALAM for the right to do so.
So Ford thumbed his nose at ALAM and sold his cars without paying royalties. ALAM naturally sued him in an effort to keep its cartel going. The legal battles lasted from 1903 to 1911, when a federal appeals court ruled that the Selden patent only applied to vehicles made to its exact specifications. (That had actually been tried, with dismal results.) Ford therefore did not owe ALAM anything. He was free to continue putting his capital into making cars the public wanted without diverting even a dollar to appeasing a group of rent-seekers.
Turn the clock ahead a century, and we find that an innovative car company faces similar obstacles.
Substitute Elon Musk for Henry Ford and Tesla for Model-T and state dealer regulation for an extortionate patent scheme, but the stories are largely the same. ALAM didn’t want competition that might break up its cartel and neither does the established auto dealer system want innovative marketing upsetting its business.
In their January 2015 Mercatus Center paper “State Franchise Law Carjacks Auto Buyers,” Jerry Ellig and Jesse Martinez discuss the way established dealers have used their lobbying clout to stifle competition.
George Leef is the former book review editor of The Freeman. He is director of research at the John W. Pope Center for Higher Education Policy.