What if a lot of what you’ve heard and been taught about capitalism isn’t quite accurate? What if the stories about the evil, greedy robber barons don’t have all the facts right? I ran across a really good and interesting article today by David Henderson about just this topic. Here are a couple of excerpts:
One of the most prevalent myths about economic freedom is that it inevitably leads to monopolies. Ask people why they believe that, and the odds are high that they will point to the “trusts” of the late 19th century that gained large market shares in their particular industries. These trusts are Exhibit A for most people who hold this view. Ask them for specific names of the villains who ran these trusts, and they are likely to point to such people as Cornelius Vanderbilt and John D. Rockefeller. They even have a label for Vanderbilt, Rockefeller, and others: robber barons.
But a careful reading of the economic research on the “robber barons” leads to a diametrically opposite conclusion: the so-called robber barons were neither robbers nor barons. They didn’t rob. Instead, they got their money the old-fashioned way: they earned it. Nor were they barons. The word “baron” is a title of nobility, one typically granted by a king or established by force. But Vanderbilt, Rockefeller, and many of the others referred to as robber barons started their businesses from scratch and were granted no special privileges. Moreover, not only did they earn their money and not only were they not granted privileges, but they also helped consumers and, in one famous case, destroyed a monopoly.
Why do we get such a distorted view of the era of the so-called robber barons? One reason is that the popular press at the time trumpeted that view. Interestingly, Ida Tarbell, the famous “muckraker” who gave Rockefeller his bad press, was not a disinterested observer. Early in her life, she had seen her father, an oil producer and refiner, lose out in competition with Rockefeller. Her father had been prospering, and her family, as a result, was enjoying “luxuries we had never heard of.” All that came to an end and Tarbell never forgave Rockefeller.
Indeed, virtually none of the impetus for antitrust laws came from consumers. Much of it came from small producers who had been competed out of business. They didn’t want more competition; they wanted less. DiLorenzo quotes one of the “trust busters,” Congressman William Mason, who admitted that the trusts were good for consumers. What he didn’t like was that when large trusts cut prices, small firms were put out of business.
But why is that so? Why is it that the late 19th-century trusts thrived, not by monopolizing but by fiercely competing? Therein lies the economics lesson. As the late University of Chicago economist George Stigler, who won the Nobel Prize in 1982, pointed out, “[M]ost important enduring monopolies or near monopolies in the United States rest on government policies.” That’s because if governments do not restrict entry, high profits of firms with market power attract new entrants and new competition the way honey attracts ants. As I put it in the tenth of my Ten Pillars of Economic Wisdom, drawing on similar wording from Stigler, “[C]ompetition is a hardy weed, not a delicate flower.”
Stigler focused on price competition, but the late Austrian economist Joseph Schumpeter emphasized what he saw, correctly, as an even more important source of competition. Schumpeter wrote:
[I]n capitalist reality as distinguished from its textbook picture, it is not that kind of competition which counts but the competition from the new commodity, the new technology, the new source of supply, the new type of organization (the largest-scale unit of control for instance)—competition which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives.
Schumpeter’s memorable term for this kind of competition was “Creative Destruction”—”creative” because the new commodity, technology, etc. created a new product or service and “destruction” because it destroyed the old. Think back to Rockefeller. He created safer kerosene and a pipeline to ship his oil. In doing so, he destroyed many smaller competitors—and made American consumers much better off. We could use more such “robber barons.”
If you’re interested, I highly recommend the whole article. It’s not too long, and it has some more details about Vanderbilt and Rockefeller. Give it a read!