The Myth of the 19th-Century Monopolists
By Thomas E. Woods Jr.
The other day I was briefly quoted in a segment for National Public Radio that dealt with the changes in American capitalism that will come about as a result of the current crisis. Everyone agreed that we needed major changes, though my proposed changes were in rather a different direction from those of everyone else. (I spoke to them for half an hour, though in this segment they used only a few sentences.)
The segment gave us a neat little history of the expansion of government power and the various transformations of the economy that have taken place over the past 150 years. Each time, the segment explained, a terrible problem created by the free market was followed by a brilliant government response. For example: “When the free-market system allowed monopolies to emerge in the nineteenth century, the Interstate Commerce Commission was created to control them.”
I love that sentence. It has fourth-grade teacher written all over it, as in: You see, children, our wise overlords, when they saw greedy people taking advantage of the public, did just the right thing, as usual. Without them, we’d all be living in rickety tenements begging for food, and at the mercy of men with white mustaches carrying money-filled sacks with dollar signs on them.
It is just this kind of thing that it gave me so much pleasure to take apart in The Politically Incorrect Guide to American History.And it comes up so often that I can’t resist addressing it here.
For the sake of argument we can overlook the capture theory of regulation, which holds that the industries being regulated tend to “capture” the regulatory agencies themselves, transforming them, beneath a rhetorical nod to the common good, into engines of privilege and protection. We can be extremely good sports and even overlook Gabriel Kolko’s argument in Railroads and Regulationthat the railroads themselves pushed for the creation of the Interstate Commerce Commission. That would unduly complicate the little cartoon version of American history it’s the job of the regime’s mouthpieces to impart.
We’ll stick just to the claim that the “free-market system” gave rise to “monopolies.” (For our purposes we can define a “monopoly” in the colloquial sense of a single or overwhelmingly dominant supplier of a good or service, since this is clearly the sense in which people who peddle this view intend it.) This is pretty much what every child is fed in our official propaganda centers, as indeed was I all through high school. Put forth in tandem with this claim are lurid tales of the so-called robber barons, who we’re told ruthlessly exploited the public to satisfy their insatiable greed – a human inclination that never seems to afflict our selfless public servants, I might add.
To be sure, no one should try to excuse those who sought to use state power to cripple their competitors. Burt Folsom made a helpful distinction between political entrepreneurs, who got ahead using underhanded tactics like this, and market entrepreneurs, who prospered because they produced what the public demanded at prices people could afford.
Andrew Carnegie almost single-handedly managed to reduce the price of steel rails from $160 per ton in the mid-1870s to $17 per ton in the late 1890s. Given the importance of steel to a modern economy, that massive price reduction yielded greater wealth and a higher standard of living for everyone. Carnegie was so efficient, in fact, that the 4000 people who worked at his Homestead plant in Pittsburgh produced three times more steel than the 15,000 workers at Germany’s Krupps steelworks, Europe’s most modern and renowned facility.
Likewise, John D. Rockefeller was able to reduce the price of kerosene from one dollar per gallon to ten cents per gallon. People could finally afford to illuminate their homes. Rockefeller also developed 300 products out of the waste that remained after the oil was refined. Claims that Rockefeller was an “unfair” competitor (whatever that means), the usual gripe of those who cannot deliver a product at prices that sufficiently please consumers, were laid to rest half a century ago in John S. McGee’s study for the Journal of Law and Economics. (John S. McGee, “Predatory Price Cutting: The Standard Oil (N.J.) Case,” Journal of Law and Economics 1 [October 1958]: 137–69.)
We might also mention James J. Hill, who grew up in poverty but whose entrepreneurial skill helped make the Great Northern Railroad, which extended from St. Paul to Seattle, a major success without any government subsidies at all. In 1893, when the government-subsidized railroads went bankrupt, Hill’s line was able both to cut rates and turn a substantial profit.
Still another of the alleged robber barons was Cornelius Vanderbilt. In 1798 the government of New York had granted Robert Livingston and Robert Fulton a monopoly on steamboat traffic for thirty years. Vanderbilt was hired to run a steamboat between New Jersey and Manhattan in defiance of that monopoly. Vanderbilt evaded capture while at the same time charging only one-quarter of the monopolists’ fare.
After Gibbons v. Ogden (1824) overturned New York’s steamboat monopoly, the fare for a trip from New York City to Albany dropped from seven dollars to three. The trip from New York to Philadelphia, which had been three dollars, fell to one dollar. Travelers going from New Brunswick to Manhattan now paid only six cents, and ate for free. When he moved his steamboat operation to the Hudson River, Vanderbilt charged a fare of ten cents, as opposed to the previous three dollars. Later he dropped the fare entirely, running his operation on the proceeds from concessions aboard the ship.
Even when his competitors had unfair advantages, Vanderbilt came out on top. Edward Collins received a government subsidy for his steamship business to provide mail delivery across the Atlantic – to the tune of $858,000 a year by the 1850s. When Vanderbilt entered the field in 1855, he outperformed Collins in passenger travel and mail delivery with no subsidy at all. Congress did away with Collins’ subsidy in 1858, and before long he went bankrupt.
Meanwhile, Vanderbilt was also outperforming two subsidized steamship lines that brought passengers and mail to California. They charged $600 per passenger per trip. The unsubsidized Vanderbilt charged $150 per passenger, and nothing to deliver the mail.
Forgive me, but I am supposed to fear and despise these benefactors of mankind why, exactly?
These men were able to acquire such substantial portions of their industries because they consistently produced goods at low prices. When they stopped innovating, they lost market share. The cartoon version of events notwithstanding, competition was vigorous. It was only after voluntary efforts – pools, secret agreements, mergers, and the like – failed to stabilize this highly competitive environment that some firms began to look to the federal government and its regulatory apparatus as a way to reduce competition coercively. “Ironically, contrary to the consensus of historians,” writes Gabriel Kolko, “it was not the existence of monopoly that caused the federal government to intervene in the economy, but the lack of it.”
Speaking of the situation that faced Standard Oil, Kolko writes:
In 1899 there were sixty-seven petroleum refiners in the United States, only one of whom was of any consequence. Over the next decade the number increased steadily to 147 refiners. Until 1900 the only significant competitor to Standard was the Pure Oil Company, formed in 1895 by Pennsylvania producers with $10 million capital…. By 1906 it was challenging Standard’s control over pipelines by constructing its own. And in 1901 Associated Oil of California was formed with $40 million capital stock, in 1902 the Texas Company was formed with $30 million capital, and in 1907 Gulf Oil was established with $60 million capital. In 1911 the total investment of the Texas Company, Gulf Oil, Tide Water-Associated Oil, Union Oil of California, and Pure Oil was $221 million. From 1911 to 1926 the investment of the Texas Company grew 572 percent, Gulf Oil 1,022 percent, Tide Water-Associated 205 percent, Union Oil 159 percent and Pure Oil 1,534 percent.
Standard Oil’s decline preceded the antitrust ruling against it in 1911, and was “primarily of its own doing – the responsibility of its conservative management and lack of initiative.”
As a matter of fact, it was very difficult for top firms to maintain their positions in a great many industries in the United States in the late nineteenth century. This was true of industries as diverse as oil, steel, iron, automobiles, agricultural machinery, copper, meat packing, and telephone services. Competition was extremely vigorous.
Whenever business leaders criticize the free market, be assured that they are hoping to replace it with an arrangement that is more likely to guarantee their profits. Any rhetoric we might hear from them about the evils of alleged cutthroat competition, or of the need to put private concerns aside for the sake of the common good, is window dressing intended to distract the dupes – who sing the praises of these firms’ “social responsibility” – from what they are really up to.
It became especially fashionable in the 1920s to suggest that laissez faire was a thing of the past, a foolish, discredited system that needed to give way to rules of “fair competition” to be established in each industry. One businessman, for instance, complained that “our profits are absolutely unprotected.” Poor baby. A trade association executive condemned any private actor who operated his business “in entire disregard of the effects on his competitor and the rest of the industry.” The American Bottlers of Carbonated Beverages declared: “My desire shall not be to undersell my fellow bottlers, but to contend with them for first place in the quality of my products and the service I render my patrons.” Appeals like this were all over the business magazines.
During the initial years of the New Deal these conspiracies against the public were given the force of law in the form of the National Industrial Recovery Act, which administrator Hugh Johnson called “the greatest social advance since the days of Jesus Christ.” Butler Shaffer’s important study In Restraint of Trade: The Business Campaign Against Competition, 1918-1938,provides all the details.
The reason that business firms have so often been eager to employ government power on their behalf is that coercion solidifies their positions far more effectively than does the free market, the system through which consumers keep them on their toes every single day. On the free market, these firms must serve the consumer effectively or close their doors, period. Even the mightiest corporations have learned this lesson.
It is government, with its subsidies, special privileges, and restrictions on competition, not to mention the looting of the public and rewarding of privileged interests that go on within the military-industrial complex, that promote monopoly properly understood and grant truly unfair advantages to some at the expense of everyone else. (On this subject in general see this article; on the military-industrial complex see this soon-to-be-published paper [.pdf].)
What a different country this would be if the drone factories that imprison the minds of American children permitted them to hear the non-Orwellian version of American history.
Thomas E. Woods Jr. is a senior fellow at the Ludwig von Mises Institute. He is the author of nine books, including two New York Times bestsellers: Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and Government Bailouts Will Make Things Worseand The Politically Incorrect Guide to American History
Copyright © 2009 by LewRockwell.com.