Public fear of big business is nothing new in this country. From legitimate concerns in the 1800s over corporate influences in politics leading to several Citizen Authority clauses throughout many state constitutions and state laws to illegitimate concerns such as Big Agriculture preferring illegal aliens for cheap, seasonal farm labor. People who own big businesses gain big wealth and class warfare is as old as wealth itself. On one side you might have some rich and powerful individuals who can be very indignant to the less fortunate and look at the poor as simply lazy. On the other side you might have individuals who feel that any person with wealth is evil and manipulative, only using their money for greedy endeavors to further their own interests. Of course there are going to be instances on both sides to back these narratives up but as a whole both are terribly misleading.
With few exceptions, such as the Roman Empire, businesses throughout history were usually limited on growth because of geographical constraints and the inability to mass produce products but the Industrial Revolution changed this for everyone. New technologies in travel and also in production allowed global markets to become a reality. Along with these new founded global markets came the ability to amass wealth as had never been seen in history. This also led to the standard of living of the average person to consistently increase for the first time in history. The world grew richer but with incredible change, new fears always arise. One of these fears in America was that a specific business within a specific industry would become so powerful that it could become the exclusive player within this industry, controlling all aspects. If said industry is vital to our way of living, such as electricity is today, then the fear is that this one player can set any price they choose and the public at large can either pay the company’s demand or lower their standard of living. This is called a monopoly. My question is how valid are these fears? Do we need government to protect us from these greedy price setters?
Let’s take a look at one of the biggest, true monopolies and probably the most famous in American history, Standard Oil. Part of Standard Oil’s fame came, not only from the powerhouse it became in our country as a corporation but from the affects that came in the form of antitrust laws (laws that break up and limit monopolies). Allegations against the firm included predatory price-cutting, inflating prices after competition was gone, and even creating company towns which basically became indentured servitude. Standard Oil was founded in 1870 and they most certainly did use unscrupulous business practices to rapidly grow, some of which I absolutely condemn. Price-cutting was included in these practices but does this really hurt the consumer? It’s hard to logically explain to me how a company offering cheaper prices on a product than any other competitor can match is a bad thing for the average citizen. Just imagine paying $200/month for your electric bill when another company comes in and offers you the exact same electricity and service but instead you only have to pay $50/month. Somehow people will have you believe this is bad for you. But the biggest move for Standard Oil was not from these less than savory practices but instead from the Crash of 1873. SO had controlled about 80% of the refining capacity in Cleveland alone by that year but 1873 allowed them to buy up failing business after failing business caused by the ’73 Crash. By 1978 SO went from 80% of Ohio to about 90% of the oil refined in all of America. Once refining was accomplished they started focusing on other areas in the industry such as production and distribution. Was all of this just the result of a greedy man or was this the result of innovation and maximization of resources?
Standard Oil was able to cut costs in ingenious and revolutionary ways in order to sell a superior, cheaper product. Some examples of this include how Rockefeller self-insured his refineries instead of following the norm which as to pay insane premiums for fire protection. He heavily invested in state of the art equipment to not only limit these disasters but also to maximize output at an exponentially greater level. He would purchase the land to build these refineries in very strategic areas that were easily accessible by water or railroad which put him in a position to have shippers compete for his business rather than him compete for theirs. SO would produce their own barrels to ship the oil and eventually made whole railcars fitted with giant tanks to replace the barrels. Before SO’s innovations, up to 40% of byproduct from crude oil refineries would literally be thrown out as waste, usually straight into the ground or rivers, but under Rockefeller’s tutelage the first “complete” refineries were formed, not only making the industry more effective, but also creating a more environmentally friendly practice. These are just a few examples of cost-cutting initiatives that came from SO but being a scrupulous, greedy business man was only a shadow of the genius that Rockefeller was.
So then, did fear come true that once they controlled a vast majority of the industry they could then hike prices in order to take advantage of the necessity of their product? No. With free markets and people born every day, competition will always be right around the corner. Companies developed such as the Pure Oil Company and the Texas Company, which continuously made SO strive for more innovation and even better pricing. In 1901 the Spindletop Strike was the largest gusher yet discovered in America. When SO was founded it had about 250 competitors. Within a year of the Strike over 1500 competitors were in the industry, pushing SO to become even smarter than had been in the past in order to keep that control, only this time the competition was well aware of what they were going up against, forcing them to remain at the top of their game. It is clear that government intervention was not necessary to keep the industry competitive but that never stops the government. Writings from Henry Demarest Lloyd and even more notable Ida M. Tarbell turned the public opinion into that of disgust and distrust for the giant conglomerate. While I do not condone everything SO stood for, such as the accusations that thugs were used to oppress competition that wouldn’t sell to SO, I also know that writers such as Tarbell often had their own ax to grind. Tarbell’s own family was among those prior competitors who couldn’t sustain business at the rate and efficiency of SO. These writers also left out that Rockefeller took care of his employees much better than anybody else by offering better pay and vacations which was very seldom for employers to offer. But much like today, writers can get the public into frenzy over a topic and once this happens, legislation will always be right behind.
Enter antitrust laws. Before Tarbell’s writings there was the Sherman Act of 1890 which became the first antitrust legislation. But after the uproar from the public, Congress broke up the SO Trust in 1911. In 1914 the Federal Trade Commission Act (creating the FTC) and the Clayton Act were passed. These laws are very vague , and apart from some revisions, are still the three core antitrust laws we have today. This vagueness is why I call the title the Antitrust Inquisition. It basically leaves decisions up to courts to look at each case and arbitrarily decide what is or isn’t an illegal trust or merger. This is also why, even though the Sherman Act was passed in 1890, the rules of the Sherman Act didn’t force SO to break up until 1911. Even today there is no direct definition of a legal or illegal merger. The laws include very subjective terms such as “unreasonable” trade or “every contact, combination, or conspiracy in restraint of trade”, and even “unfair or deceptive acts or practices”. There is not a standard definition for unreasonable, restraint of trade, or unfair practices within these laws. Each business is simply subject to that court’s interpretation of these words. This creates a ‘pick and choose’ situation where business innovation is held hostage by fear of government bureaucracy.
At the same time this government, which so vehemently speaks out against monopolization, has been setting up their own monopolies at will. The effectiveness of SO was literally a major reasoning tool that influenced the decision to keep AT&T as a protected monopoly up until 1982. The biggest difference between a government imposed monopoly and a true, free market monopoly is the allowance of competition. In the free market there will always be some new mastermind lurking in the shadows developing their own strategies and tools in order to capture their piece of the pie. However, under a government monopoly, it is literally illegal to try and compete which means no amount of innovation can attack the power held by that company. A great example of this today is electrical companies. You can only use the company that the government has set up in your area and this is the definition of predatory price-setting as we can’t even know how inexpensive electricity could get with free market competitors doing everything in their power to get the prices as low as possible. In spite of government protection, smaller companies are still showing ways to threaten the big, power players. Imagine if they were completely free to explore the best options possible.
U.S. Steel is another example of the free market working, even against a true monopoly. At it’s height U.S. Steel controlled about 67% of steel production. According to antitrust logic this killed competition and allowed them to run rampant with their pricing. Reality has a funny way of weeding out truth. Even at their height, competition never ceased. Hungry up and comers wanted their piece and developed ways to get it. Better business practices were developed that U.S. Steel simply couldn’t keep up with. Throughout the decades following their control, the federal government had imposed many policies to support U.S.S. such as tariffs on imported steel, trade restrictions, subsidies, and tax credits. All of this protectionism did little to save the business as by 2009 The Corporation was producing less than 10% of all steel used in the United States. I wrote about one of these instances and the effects of government protectionism in my article here.
All in all, I can understand where the fear would come from with companies holding so much power over an industry but when we look at the facts we should be much more concerned about government imposed monopolies rather than free market innovators who have the ability to raise our standard of living. Competition will always be our ultimate system for checks and balances. I do not take this position to the extreme of removing all regulations involved in business but that we must use our lessons from history to understand how important the limited role of government and what the affects of that role can be, especially when it comes to restraining consumer options. Check back for my part 2 of this topic wick will look at another example of government protectionism in the form of patent laws. In short any business that is truly providing the best options for it’s consumers will not need protection from the government and when they do then we are probably better off without that company existing.