Ron Chernow
The Titan refers to John D Rockefeller, Sr. He is called that because of his Titanic role in forming American industry into what would become the future of large scale industry as well as his incredible Philanthropic charitable actions such as founding the University of Chicago or The Rockefeller Institute for Medical Research. This institute completely transformed the medical profession in America at that time from a backwoods con man’s game of supplying “medicine potions” to an intellectual powerhouse investigating and obliterating the communicable diseases plaguing mankind at the time. Rockefeller became the wealthiest man in the world at this time and arguably the richest man who ever lived accounting for inflation today, and his impact on our culture and the ideas that people have about business/corporations, wealth disparity, and the legal role of the State to limit and regulate “cutthroat” business activity and large-scale wealth accumulation has been one of the most profound and societally ground shaking in American history. Even among his “robber baron” peers, he stands out far above the Carnegie and Morgan crowd with his massive wealth despite his coming from such a poor family, his devotion to family and piety, and his dedication to making money while living simply so that he could give it away to others.
I’m going to detail out some of the historical and political parts of the book below, but I wanted to mention first how much I enjoyed the personal stories in this book. From the wild adventures, unfaithfulness and con-games of his father Bill to his spendthrift and ungrateful brother Frank making up stories to reporters susceptible to sensationalist stories to his daughter running off to Europe and spending tons of money on and taking out loans to buy priceless medieval decor and her support of a psychiatrist who parted ways with Freud with questionable motives and views, the book really made me feel like I understood much more about the life of this amazing man. I appreciated how calmly he handled everything, even the crises, and how kind he was to his family, horses, and every living creature he came across. Most of the time, reporters made up things about him because he was so secretive that they didn’t know who he really was. In one part of the book, Ida Tarbell, his later arch-nemesis in the press, sneaked into his church to steal glances at him in order to write a defamatory caricature of him for her magazine. The book for me really took the wind out of the sails of someone who takes one look at Standard Oil and dismisses him outright as a “robber baron”; he lived his personal life in a way that could not possible be construed as cruel or avaricious. Yet the author was still very fair in his judgements and generally showed both sides of the coin.
I particularly liked the stories of how his wife requested that they only buy one bicycle for the children, despite them having plenty of wealth, so that they learned to share and not to be greedy with their possessions, or how he took an interest in engineering and helped design his house to maximize the sun inputs for his later in life unhealthy wife, or how he paid for private lessons of golf secretly so that he could play a prank on his wife and pretend like he’d never done it before only to place a beautiful shot down the fairway. His sadness when his wife died was very hard on him, but the story about him hiring someone to distract guards so he could move her body to the Cleveland cemetery was incredible (since he owed millions of dollars in taxes to the city and refused to pay; he was thus banned from being there in person to deliver her to heaven). His antics later in life were hilarious as he surrounded himself with beautiful younger women and dressed in bright, vibrant color schemes while taking road trips in his automobile and calmly telling his driver to set speed records when other drivers would overtake him on the roads.
But let’s talk a bit about Standard Oil, since this is where Rockefeller’s wealth really came from. There are a couple of topics that were brought up in the book and deserve more insight from a Misesian and Austrian economics viewpoint:
The Railroads and “Rebates”
One of the most cited complaints about how Standard Oil engaged in vile business practices was regarding it’s relationship to the railroad corporations and their issuance of “rebates”. Rebates were designed to give lower prices to certain companies and penalize other companies with higher prices. The railroads would even go so far to actually pay Standard Oil for each barrel of oil one of their competitor’s shipped!
So the example would be: if I was running a refinery and decided to send my oil at 20c per barrel, Rockefeller would pocket 10c of each barrel that I shipped, in addition to it only costing him 10c to send his own barrels. He essentially was sending his oil for free by charging me for the shipping fees. (these are just examples and not actual prices, although the exact prices charged were provided in the book. I read the audiobook so it would be very hard to find them again..)
This practice understandably raised the ire of people once they found out about this practice in the early 1900s, as Rockefeller had been colluding with the railroads pretty much up until 1900 when several states outlawed the practice. There are a couple of historical environmental factors missing from this analysis, however:
- First, railroads at this time were essentially monopolies that were controlled and regulated by the government. Far from being bastions of free market capitalism, railroad companies were the first major public-private collaborators which would then morph into the framework of the American corporation. This cozy relationship originated with Lincoln and was continued by many politicians afterwards, and, as such, they were plagued by constant corruption, subsidies, inefficiencies, bureaucracy, and other destructive political influences. They were actually, for all intents and purposes, monopolies created by the government because their competitors were so restricted and cajoled at every step. The fact that they were able to benefit some high paying customers who paid them bribes at the expense of smaller shippers speaks volumes to their special privileges given to the railroads by the State, when, under free market capitalism, other non-monopoly railroads would otherwise charge lower shipping rates in general in order to bid more customers to them.
- Secondly, “price discrimination” is not a problem in a free society. Assuming, above, that anyone can enter into the market and are not restricted by government laws/special privileges being given to their competition, then whatever price they charge to whomever is up to their discretion. If their prices are too high, other competitors will charge lower to attract their customers. If their prices are set too low to benefit the “big guys” while the “small guys” have to pay higher rates, the “small guys” will just bring their shipping needs elsewhere. It is only in a captive customer base, captive in this case by government decree, that the railroads could get away with this kind of graft.
It is important to note that the author points out there was some legitimacy to the lower prices, as well. Because of the economy of scale, larger sellers who can guarantee a certain quota of shipments on a set timeline is far more enticing to a shipping business than disparate barrels being sent here and there once in a while by a small refinery. The consistency of large businesses can and should alter prices in favor of the larger seller, as it’s much easier to package and ship barrels on time to a set number of many receivers. There’s nothing wrong with this practice in a free market; we benefit from this type of “buy more save more” concept every time we buy in bulk at our Costco/BJ’s stores.
Should we demand that customer prices be set in a unilateral “fair” way if it would be harmful to the customers, e.g. by demanding that BJ’s sells it’s products at the same price as a convenience store would per unit? Or that BJ’s requires a membership of just a select group of people in order to gain access to the lower prices and necessarily discriminating against those without membership? Why is therefore o.k. to attack the railroads (again assuming that they are not quasi-public government entities, which they were) for trying to offer more desirable business customers the lowest possible price on shipping?
The Banks
One of Rockefeller’s major complaints about the kerosene/oil industry at the time of him jumping into it was that there seemed to be “inefficiencies” everywhere. People built way too many refineries, they mismanaged them, couldn’t turn a profit, there was disorganization with their production quality and processes, etc. There was a disconnected structure in this landscape. The oil industry was at this time highly speculative. The prices for oil seemed to jump erratically from high to low with little to no connection to reality or consumer demand. This led to Rockefeller’s famous claim that “competition” was outdated. What we instead needed was monopolies/trusts/”cooperation”.
If you’ve read my blog or other Austrian economics stuff, you’ll know where I’m going with this. The banks, fiat money, and fractional reserve banking are largely responsible for this nonsensical investment pattern. The banks, with their loose policy of credit expansion and lending out more paper money than actually exists in real savings and capital creates the ABCT, the Austrian Business Cycle Theory. The boom of the banks lending out money willy-nilly creates malinvestment whereby, in Rockefeller’s case, too many refineries are created and not enough are careful enough with their new investments. Since this credit flows freely without much consequence (since the real savings required to actually make these loans in reality does not exist), a failure to live within the means and bounds of economic reality emerges.
Rockefeller astutely observed this phenomenon, but, lacking Misesian insight into the causes, he concluded that there was just too much competition. He didn’t realize the problem was where these competitors were getting their funding, not competition itself.
What’s particularly interesting about this understanding of the banks as the source of the problem in light of Rockefeller’s creation of his oil trust was his incredible command of the banking system to get them to divert their credit expansion towards himself instead of his competitors. He was brilliant at finding loans everywhere; eventually banks would hide some of their available loans in order to give them to him knowing that he would require a new loan at some point. He built his empire on expansionary credit loans. He would spend an entire day calling all the banks in Ohio to secure enough loans for purchasing more and more oil refineries.
His bets paid off for him and the banks, but we must not underestimate their role in the creation of economic problems in this age and beyond. With the backing of government laws protecting them from their bad decisions, the panics and financial catastrophes of the late 1800’s, especially the Panic of 1893 (also caused by loose credit and the subsequent distrust of paper money especially in light of the new fees imposed on exporting gold bullion), led directly to the creation of the politically created, ultimate, banking, bubble machine called the Federal Reserve.
From this we must realize that many of the problems created by corporate America leading to the anti-trust legislation and business regulations were brought about directly by the earlier decisions of the banks and their blowing up of economic bubbles which created massive, systematic malinvestment and enormous, “octopus” corporations.
Monopoly – Cooperation vs Competition
Rockefeller coined the term “cooperation” to hearken the new age of trusts and cartels of business. To him, “competition” was what had plagued the oil industry and had created the inefficiencies (which was generally the fault of the banks/financial sector). What he presented then was a false dichotomy: he claimed the we needed either cooperation or competition. In the market economy, competition IS cooperation. Those who enter into competition only do so (if not fueled by the booms of the banks and their loose credit expansion of fiat currencies) because they see some unmet customer need: they can offer lower prices or higher quality or through creative innovation or some other improvement.
In this way, competition encourages all businesses, new and old, to alter their practices to be closer in line with the customer’s current needs. For what good is the marketplace if not as a mechanism to harness the collective and cooperative efforts of mankind to best meet customer demand while also profiting those who contribute to that goal? Competition plays a crucial role in this process by discarding inefficient or unwanted businesses and strengthening desirable ones.
Moreover, far from agreeing that building his trust was actually “cooperation” among the oil companies, there was actually bitter resentment and resistance to his trust. Those still operating in defiance of him were derogatorily called “independents” and were taken to task economically by the already cartelized and government regulated banks and railroads, as described above. Ida Tarbell, the young journalist defaming Rockefeller, had a father who was ruined by Rockefeller as he refused to submit to the trust and thus strengthened her resolve to bring him down.
Yet despite Rockefeller’s goals and massive action towards monopoly, he never seemed to be able to entirely corner the market. At times he owned the vast majority of it, yet new refineries continually popped up. People made an entire business of creating new refineries to sell to him. He eventually had to make them sign contracts saying that they would sell their refinery AND not build any new ones because this practice was so wide spread. And as mentioned above, he never would have been able to buy up all these refineries if he didn’t have the banks expanding credit to give him constant loans. Eventually, international competitors popped up in many other places around the world and demolished his attempts to create a monopoly over all the oil production.
While there is rumor of violence being threatened against his competitors in order to force them to join the trust, we don’t have any real evidence of this. The court case brought against him regarding it was largely a sham. Yet despite being largely non-violent, he was generally o.k. using the mechanisms of government via the banks/railroads to build his monopoly. It can be said he may not have realized these implications, as government relations to business were generally hidden for a long time in this time period, but later on, starting in the 1900s after Rockefeller left, the cooperation between government and Standard Oil became very clear with many government officials essentially put on Standard’s payroll during backroom deals. Standard officials would pay for the benefit of legislation either not targeting them or targeting their competitors, which was the beginning of the unholy alliance between business and government later perfected in the 20th century. Standard was also lured by the high paying public funds of metropolitan cities with their power to tax and then purchase massive contracts of kerosene lamps to light their streets, and many backroom deals were made regarding this as well.
Among all this, can we truly consider Standard Oil to be a monopoly? To this point, we turn to Murray Rothbard’s exquisite and ground breaking chapter in Man, Economy and State on monopoly. Here he says:
“A common argument holds that cartel action involves collusion. For one firm may achieve a ‘monopoly price’ as a result of it’s natural abilities or consumer enthusiasm for it’s particular product.. What is actually involved here is cooperation to increase the incomes of the producers. For what is the essence of cartel action? Individual producers agree to pool their assets into a common lot… But is this process not the same as any sort of joint partnership or the formation of a single corporation?
Any existing situation on the free market will tend to be the most desirable for the satisfaction of consumers’ demands… Monopoly is [therefore] a grant of special privilege by the State, reserving a certain area of production one particular individual or group.”
In other words, absent special privileges given to it by the State, there is no way to tell the difference between an undesirable cartel and a desirable one other than by whether customers purchase goods from it or it’s competitors! If a cartel that has formed among 100 different oil refineries provides the lowest possible price and the highest possible quality (given all other demands and active competitors), and no competition has been barred from entry or special privileges granted to the cartel by the government, then it must be said that it is the most desirable state of affairs that customers could ask for. Despite it being the only seller, the largest seller, or any other criteria, we can assert that if the cartel is too large, it’s components would break up because there would be more profit in it’s breakup and consumers would be then better served by the smaller companies. If it’s too small, then it would continue to sign on members until the most beneficial level of profit is reached and consumers are, again, best served by the cartel getting larger.
In other words, there is no such thing as a company being too big or too small except in the subjective opinion of it’s onlookers. What Ludwig von Mises said about prices also applies to the analysis of so-called monopolies:
“The concept of a “just” or “fair” price is devoid of any scientific meaning; it is a disguise for wishes, a striving for a state of affairs different from reality.”
“Predatory Pricing”
Speaking of “fair” prices, the other major complaint brought against Standard Oil was their “predatory” pricing behavior. The phrase itself is very much intended to generate primal, emotional reactions; it incites visions of the lion stalking it’s prey in the jungle, poised and ready to violently wrestle it to the ground and destroy it. Any company who is “predatory”, you see, must be bad. Other phrases describing business practices such as “cutthroat capitalism” or “price gouging” or “robber barons” are meant to incite similar emotions; they are comprised of extremely violent words and sound ethically problematic.
Yet, what did Standard do by lowering their prices (notice the difference in emotional reaction to this set of words accurately describing their market behavior)? Surely, their goal was to limit their competition. The lower prices reduces the incentive for others to enter into the market because there is less profit available to them. This is a double edged sword: it also reduces the profit margins of the company who reduces the prices.
But who always benefits from lower prices? The customers. And who always benefits from higher prices? The businesses. The market is a constant balancing act between these two, distinct economic forces. It can go neither too far in either direction because what Mises called “catalactics”: the formation of prices is the outcome of a constant process of customers bidding prices down and businesses pushing prices higher. The outcome is the general price.
Moreover, this distinction of customers vs businesses is blurred when we realize that members of business must also be, in other parts of their life, customers and customers must also be members of businesses; these multiple roles are a necessary outcome of economic exchange. Businesses therefore want higher prices for their industry and lower prices for other industries! Again, this beautiful balance places the interests of different people in harmony with their various roles as they trade, in those roles, with one other. This is a symbiotic balance that keeps the economy in a constant state of flux that tends towards the satisfaction of the most amount of people possible.
So why doesn’t Standard Oil lower their prices below profitability and then raise them after their competition leaves the market? The problem is that there has been no actual example of this working in history. Whenever a company finally raises their prices, competitors rush to enter the market and profit again! In fact, usually as the “monopolist” keeps their prices below profitability, it’s competition just cuts it’s sales and waits while customers rush to the monopoly. After it has incurred sufficient losses, they just fire up their sales again.
This of course was never Rockefeller’s approach. He was far too clever and smart. He never reduced his prices below profitability; instead, he found amazing and innovative ways to save money while still keeping wages high. For example, he had his packaging plants use slightly less solder for securing their oil barrels for transport, and he saved tons of money per year while maintaining high quality despite it being such a seemingly superfluous change. He embraced pipelines, found ways to reduce his shipping costs (see above), and used many other tactics to keep costs low. This savings was passed along to the customer, who benefited immensely.
What does bring about the “bad” conditions of so-called predatory pricing then? As we see from Rothbard’s conclusion above, those companies with special privileges are those that can manipulate the market and gain a monopoly status in order to drive their competition out of the market and increase prices universally. One extremely good example of this playing out is that of The Bell Company in the late 1800s. From 1876-1894, Alexander Bell enjoyed a legal monopoly of his product. He produced 270,000 phones in that time period.
As soon as the patents expired, over 80 companies entered into the market that same year and received over 5 percent share of the entire telephone market. By 1900, there were over 300 companies who gained 51 percent of the market. At that time, over 6 million phones had been delivered to customers. That’s right: in almost 6 years, a competitive market had produced more than 20 times the number of phones that Bell was able to produce in 20 years. Granted, production processes had improved from when he started, but only capitalism and competition can account for such a large boost in consumer products being delivered to so many customers.
Theodore Vail, an early version of what was to be the fairly typical 20th century actual monopolist, inherited the Bell Company and instead of ramping up his production, lowering his prices, and trying to get more customers to voluntarily buy his product than his competition, of course turned to the government to secure his monopoly by bullying and attacking his competitors by legal mandate.
Telephones were nationalized by the government under the guise of war necessity (a likely excuse) and prices were centralized and controlled by the State. People in rural areas, where it was clearly much more expensive to wire the new connections, ended up paying the same price as those in the city, where rates should have been extremely low. As a result, the prices were effectively subsidized in rural areas and investment was discouraged. Smaller companies couldn’t afford the high barrier price and swiftly went out of business leaving only The Bell.
So what has a better track record of actually creating monopolies in society? Predatory pricing? Or government intervention? Any investigation of history proves the latter to be the unquestionable victor in it’s ability to completely ruin small businesses and run lesser competitors out of the market permanently. The State invariably wins the title of “most predatory” in every case inspected.