In Praise of "Robber Barons"

After seeing a piece of my son's history curriculum at school, I realized for about the hundredth time just how poor an understanding most people have about the great industrialists of the 19th century, so unfairly painted as "robber barons".  While it is said that "history is written by the victors", I would observe that despite the fact that socialism and communism have been given a pretty good drubbing over the last 20 years, these statists still seem to be writing history.  How else to explain the fact that men who made fortunes through free, voluntary exchange of products can be called "robber barons"; while politicians who expropriate billions by force without permission from the most productive in society are called "progressive".

To be sure, capitalists of the 19th century sometimes played by rules very different from ours today, but in most cases those were the rules of the day and most of what they did was entirely legal.  Also to be sure, there were a number of men who were fat ticks on society, making money through fraud and manipulation rather than real wealth creation (Daniel Drew comes to mind).  However, most of the great industrialists of the 19th century made money by providing customers with a better, cheaper product.  In the rest of this post, I will look at two examples.

The first is Cornelius "Commodore" Vanderbilt, the person to whom the term robber baron was originally applied (by the New York Times, interestingly enough - some things never change).  While Vanderbilt is perhaps best known for his New York Central railroad, the term was actually applied to him earlier in life in his shipping days, where he made a fortune running steamships in and out of New York City.  Vanderbilt stood accused of overly predatory tactics in moving into rivals territories.  However, in 1859 Harpers Weekly observed (via An Empire of Wealth by John Steele Gordon):

...the results in every case of the establishment of opposition lines by Vanderbilt has been the permanent reduction of fares.  Wherever he 'laid on' an opposition line, the fares were instantly reduced, and however the contest terminated, whether he bought out his opponents, as he often did, or they bought him out, the fares were never again raise to the old standard.  This great boon -- cheap travel-- this community owes mainly to Cornelius Vanderbilt". (sorry, no link available -- I guess they weren't putting their articles online in 1859)

In many ways, Vanderbilt was the Southwest Airlines of his day, and, just like with Southwest today, towns begged for him to serve them because they knew he would bring down rates.  In fact, there is actually another parallel with Southwest Airlines.  In the early days of Southwest, most of the airline industry was regulated such that new entrants competing at lower prices were pretty much excluded by government rules.  Southwest got around these rules by flying only in Texas, where interstate rules did not apply.  Their success in Texas was a large reason for the eventual demise of government regulation that effectively protected fat and inefficient incumbent airlines, with drastically lower fairs the result.

When Vanderbilt first entered the steamship business, most routes were given as exclusive charters to protected monopoly companies, most run by men with friends in the state government.  Vanderbilt took on the constitutionality of these government enforced monopolies and, with the help of Daniel Webster, won their case in the Supreme Court.  Within a decade, the horrible experiment with government monopoly charters was mostly over, much to the benefit of everyone.  While private monopolies have always proved themselves to be unstable and last only as long as the company provides top value to customers, publicly enforced monopolies can survive for years, despite any amount of corruption and incompetence.  Vanderbilt, by helping to kill these publicly enforced monopolies, did more than perhaps any other man in US history to help defeat entrenched monopolies, yet today most would call him a monopolist. 

By the way, there are two charges against Vanderbilt that partially stick.   Those are that he bribed legislators and that he sought out price fixing agreements with his competitors.  Both are true, but both need context. 

To understand the bribery, one has to recognize that NY state passed a law that you could not be convicted of bribery solely on the evidence of the other party involved in the bribe.  In other words, they effectively made bribery legal as long as you were smart enough to do it without witnesses.  The real corruption was in the NY legislature at the time.  While Vanderbilt's motives were likely not always pure, no one who understands the state of NY at the time would deny that Vanderbilt would have been gutted had he not pro-actively played the bribery game himself in Albany in self-defense.

The price-fixing charge is even easier to deal with in context - basically price fixing agreements were entirely legal at the time.  In fact, price-fixing has been thought necessary, particularly in transportation, by politicians of all stripes for centuries - remember as late as the 1970's we had government enforced price-fixing in railroads and airlines.  In the 1930's, FDR via the NRA briefly instituted a government price-collusion scheme on the entire economy.

My other featured industrialist here on hug-a-robber-baron day here at Coyote Blog is John D. Rockefeller.  At one point of time, Rockefeller controlled 90% of the refining capacity in the country via his Standard Oil trust.  He was and is often excoriated for his accumulation of wealth and market share in the oil business, but critics are hard-pressed to point to specifics of where his consumers were hurt.  Here are the facts, via Reason

Standard Oil began in 1870, when kerosene cost 30 cents a gallon. By 1897, Rockefeller's scientists and managers had driven the price to under 6 cents per gallon, and many of his less-efficient competitors were out of business--including companies whose inferior grades of kerosene were prone to explosion and whose dangerous wares had depressed the demand for the product. Standard Oil did the same for petroleum: In a single decade, from 1880 to 1890, Rockefeller's consolidations helped drive petroleum prices down 61 percent while increasing output 393 percent.

By the way, Greenpeace should have a picture of John D. Rockefeller on the wall of every office.  Rockefeller, by driving down the cost of Kerosene as an illuminant, did more than any other person in the history to save the whales.  By making Kerosene cheap, people were willing to give up whale oil, dealing a mortal blow to the whaling industry (perhaps just in time for the Sperm Whale).

So Rockefeller grew because he had the lowest cost position in the industry, and was able to offer the lowest prices, and the country was hurt, how?  Sure, he drove competitors out of business at times through harsh tactics, but most of these folks were big boys who knew the rules and engaged in most of the same practices.  In fact, Rockefeller seldom ran competitors entirely out of business but rather put pressured on them until they sold out, usually on very fair terms.

From "Money, Greed, and Risk," author Charles Morris

An extraordinary combination of piratical entrepreneur and steady-handed corporate administrator, he achieved dominance primarily by being more farsighted, more technologically advanced, more ruthlessly focused on costs and efficiency than anyone else. When Rockefeller was consolidating the refining industry in the 1870s, for example, he simply invited competitors to his office and showed them his books. One refiner - who quickly sold out on favorable terms - was 'astounded' that Rockefeller could profitably sell kerosene at a price far below his own cost of production.   

More here. In fact, many, many of these defeated competitors became millionaires in their own right with the appreciation of the Standard Oil stock they got in the merger.

Eventually the Standard Oil monopoly weakened as most private monopolies do.  Monopolies seldom if ever engage in the price-increase games everyone expects them to, but they do get risk averse and lose vitality over time without serious competition.  This indeed did happen to Standard Oil, and it missed a number of key market turns, such as the Texas oil boom.  By the time is was broken up under the Sherman anti-trust act, Standard's market share had already fallen to 60%.  As would be the case many times in history, the government acted on the economic "threat" of Standard Oil at the very time the market was already doing the job.

Ever since, people have expended a lot of unnecessary energy getting worried about bigness and monopolies in industry.  I always laugh when "progressives" decry the monopoly power of the oil industry to manage prices.  I worked for the oil industry in the 80s, and if they had the power to manage prices they sure were doing a crappy job of it.  If someone thinks that oil companies have been manipulating prices, they have to explain this chart to me.  If prices are manipulated at all, they look like they are being kept low and stable.

Another great example of monopoly paranoia is the near continuous Microsoft-bashing in the courts.  The most famous anti-trust case was the successful case by Netscape and numerous other Microsoft competitors attempting to kneecap Microsoft, nominally for monopolizing the browser market.  Now lets leave aside the obvious issue of just how consumers are getting hurt by being given a free browser by Microsoft.  The plaintiffs apparently successful argument (incredibly) was that through a series of technology and marketing moves, Microsoft prevented competition.  If that is so, if competing with Microsoft is so hard, then why are 30% of my visitors using Firefox when none used it a year ago.  I use Firefox, and you know what, it took me about 5 minutes to download, install it and start running it.  Boom, monopoly gone.  Lots more on anti-trust here.

UPDATE:  Welcome to the Greenwich Public Schools.  Thanks for linking me from your web site.  Despite my Arizona home today, I actually lived in Greenwich for a while growing up.  You can find other essays on capitalism and individual freedoms here and here, or you can check out Dave Berry, who is much funnier than I am.  If you are looking for a stronger defense of free markets than you can find in most public schools, a good place to start is at the Cato Institute.

  • Scott

    Fantastic piece, Warren.

  • http://home.earthlink.net/~sleepyjackal/index.html Jackal

    A very good book on Vanderbuilt, the Scrantons, Hill, Rockefeller, and Schwab is "The Myth of the Robber Barons" by Burton W. Folsom. I don't know if you allow links here, but you can find it on Amazon.

  • http://the-raw-prawn.blogspot.com/2005/02/carnival-of-capitalists.html The Raw Prawn

    Carnival of the Capitalists

    Welcome to the President's Day edition of Carnival of the Capitalists, the weekly round-up of business and economics blogs.

    While you're here, please take a look at a few of the other posts. The Raw Prawn primarily deals with business, economics, ...

  • http://www.davidmsc.com david

    Excellent article...thank you.

  • Max Lybbert

    I liked the piece, and the historical perspective.

    Even so, I still don't like Microsoft. I no longer think that their size is morally wrong, but I'm not about to kiss Bill Gates. Not that I have to. And not that he'd want to kiss me! (g)

  • http://fallofthestate.blogspot.com/ Brian Moore

    While I completely agree that the portrayal of the "Robber Barons" as evil is wrong, and based on their perceived "greed," these guys weren't paragons of the free market -- as you point out, they bribed and manipulated an extremely corrupt government (which was the real source of the problem) to get what they wanted. In my opinion, modern "robber barons" like Gates are far more noble than those of the late 1800's.

    I use Firefox, and you know what, it took me about 5 minutes to download, install it and start running it. Boom, monopoly gone

    Amen. If Internet Explorer was a monopoly, then it had to have been the weakest monopoly in history.

    Excellent work. :)

  • speedbird

    'The man who starts out simply with the idea of getting rich won’t succeed; you must have a larger ambition.'

    - JD Rockefeller

  • Jennifer Harris

    Do you happen to know which industrialist donated pipe organs to churches????? I can't find that anywhere. I did however find that you are right and I reaally like your web site.

  • Rebecca

    Great article, but we are learning this in History class and there is an other side. We are only do J.D. Rockefeller.

    He cheated people: He paid a widow with children, $79,000 for what cost her husband $200,000, after telling her he would 'stand by her' and give her a fair price.
    His competitors' kerosene wasn't just prone to explsoions; he helped it along. He paid off a guy to set off dynamite a rival refinery.

    Basically, he wasn't all bad, but he wasn't all good either.

  • grumpY!

    the robber barons are a true role model for today's business people. they almost managed to destroy the fre emarket entirely with their cheating, cartels, price gouging/undercutting etc.

    it took the government to impose the free market on these people, and they fought this until the very very end.

  • cornelius vanderbilt the 12th

    this site really sucks!!!!! all the information is wrong. i was related to him. he was a great man and wasnt greedy! if he was greedy then why didnt he have more money than $679,000?

  • David price

    Here is a good example of the tenuous nature of climate change claims.I live in England where August has been cold and wet. We have had arctic air over the country for days. We are given to believe that the polar icecap is receding, but if the polar icecap was receding August in our part of the world would be hot and dry as when the icecap receded, westerlies would move northward and high pressure systems from the south predominate.
    Something is not right. the polar icecap's doing fine.

  • JD Rockefeller

    No, I was not, and shall not be greedy. You see, after I realized that my money was granted to me by God's will, I decided to donate, and give back to the world from which I had so much.

  • James Buchanan Duke

    Duuuude...liek, u forgot 2 mention me. yea

  • yer

    yer

  • http://benfrommo.wordpress.com/ BenfromMO

    I realize I am late to this party...however I should start with the most notorious example of the usage of this term came from railroad rights and lands. The Government was notorious for corruption in this field and a lot of the people involved in railroads in general used bribes to find out (for instance) where the railroad route would head, then they would buy that land for pennies from clueless people and then the Government would buy them out for a substantial profit. That was the largest example, and it was common back in that day. Most people did not see an issue with it, but the term does come from how the "robber barons" would basically rob the locals and make a killing.
    I could link to a lot of examples of this, but that is where the term originated for the most part back in this day....but you are correct, the term was not an anti-industrialist insult by any means at first, it was an insult to people who would rob the poor/middle class just to enrich themselves using cronies both ways to make a killing. Not all industrialists would do this as in your example and especially those involved outside of railroads...but the insult would still be used at times just for any rich guy at times.
    But as things start out they change. For instance at the start: the term was mostly for those who were known cheats, hustlers and otherwise low-lifes who were nothing but greedy cronies of politicians who used their political connections to amass wealth through mostly fraud. It did spread as many things do...and covered others who probably did not deserve the title.
    So in essence, yes you are correct, but so are the books in a way. As the term spread and as people developed this "anti-industrialist fever" at that point in time (it seemed this really started taking off around 1900 from my reading)...that the term kind of stuck for any industrialist. Was their socialist connections back then? I can not answer that, but the rewriting of history was not here as much today as it was in the early 1900's when people would describe a lot of the late 18th century industrialists as robber barons....and hence the history books of today describe them as robber barons because that was how most people in the public viewed any rich industrialist by around 1900. In order to compensate for this public change, many of the famous industrialists went out of their way with charitable works and other things such as that to change public opinion, but as the history texts show us: It mattered not because the likes of Vanderbilt, Carnegie, etc are still plagued as robber barons. Its wrong perhaps that this was not updated, but yes, the books are never going to be fixed for correctly describing industrialists of any type as anything but "scum" in the end.
    Kind of for fun, its interesting to note how this time period (early 1900's) seems very similar to our day today. Big industrialists of many stripes are called names and evil, etc. This is at the same time that cronyism is still rampant on large scales.....but it will all blow over in the end. The class warfare will ratchet on down at some point when the politicians can no longer get people excited about it...and real reformers back then came in and changed society, perhaps not for the best, but they did remove a lot of the cronyism.....(just a side-note really.)
    Source: Most of this is just what I picked up from reading books about this time period. I really got interested in the Copper Wars myself, which is a very fascinating topic...and a lot of this information was in the books of this time period.

  • buffonelder101

    competition is a sin, eh?