The Robber Barons: Neither Robbers nor Barons

By David R. Henderson. Excerpt:

"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.


Consider the case of Cornelius (“Commodore”) Vanderbilt. Even the excellent recent book Why Nations Fail, by MIT economics professor Daron Acemoglu and Harvard political scientist and economist James A. Robinson, gets the Vanderbilt story wrong. And not just wrong, but spectacularly wrong. They claim that Vanderbilt was “one of the most notorious” robber barons who “aimed at consolidating monopolies and preventing any potential competitor from entering the market or doing business on an equal footing.”


In fact, it was Vanderbilt’s competitor, Aaron Ogden, who persuaded the New York state legislature to grant Ogden a legally enforced monopoly on ferry travel between New Jersey and New York. And Vanderbilt was one of the main people who challenged that monopoly. At the tender age of 23, Vanderbilt had become the business manager for a ferry entrepreneur named Thomas Gibbons.
 Gibbons’ goal was to compete with Aaron Ogden by charging low fares. In doing so, they were purposely breaking the law—and helping their passengers save money. In the case Gibbons v. Ogden, the U.S. Supreme Court ruled that, indeed, the New York state government could not legally grant a monopoly on interstate commerce.1 In short, Cornelius Vanderbilt was not a monopoly maker in this case, but a monopoly breaker.


What about John D. Rockefeller? Acemoglu and Robinson get that one wrong also. They write that by 1882, Rockefeller “had created a massive monopoly” and that by 1890, Standard Oil “controlled 88 percent of the refined oil flows in the United States.” Let’s look at the facts.


Early on, Rockefeller knew that he was at a disadvantage relative to his competitors. His company’s headquarters were in Cleveland, 150 miles from Pennsylvania’s oil-producing regions and 600 miles from New York and other Eastern markets. Thus, Rockefeller faced higher transport costs than many of his competitors. To offset that disadvantage, he built a pipeline to ship his own oil and used this pipeline to bargain down railroad rates. He got the lower rates in the form of rebates rather than outright rate cuts. Why? I don’t think economic historians are sure about why, but here’s my hypothesis: the railroads gave rebates because this is a standard way that members of a cartel “cheat” on price. They can truthfully tell the other customers not getting the rebates that they are charging everyone the same rate. To the extent that this was happening, Rockefeller was, himself, breaking down a railroad cartel. And breaking down cartels is supposed to be good, not bad.


But why would railroads single out Rockefeller for rebates? As noted, it was partly because of his credible threat to use his own pipeline. Also, as Reksulak and Shughart note, he strategically built his first refinery in a place that would allow him to ship oil to Lake Erie and then on to the Northeast market. This, note Reksulak and Shughart, allowed him to bargain for lower railroad rates during summer months.2 In addition, Standard Oil provided loading facilities, discharge facilities, and fire insurance at its own cost. Finally, Standard Oil provided a heavy volume of rail traffic at predictable periods, an advantage that was crucial for railroads with their high fixed costs and low variable costs."

"University of Chicago economics professor Lester Telser, in his 1987 book, A Theory of Efficient Cooperation and Competition,4 points out that between 1880 and 1890, the output of petroleum products rose 393 percent, while the price fell 61 percent. Telser writes: “The oil trust did not charge high prices because it had 90 percent of the market. It got 90 percent of the refined oil market by charging low prices.”"

"In some path-breaking research in the 1980s, Loyola University economist Thomas DiLorenzo documented these facts. In a 1985 article,5 DiLorenzo found that between 1880 and 1890, while real gross domestic product rose 24 percent, real output in the allegedly monopolized industries for which data were available rose by 175 percent, over seven times the economy’s growth rate. Meanwhile, prices in these industries were falling. Although the consumer price index fell 7 percent in that decade, the price of steel fell 53 percent, refined sugar 22 percent, lead 12 percent, and zinc 20 percent. The only price that fell less than 7 percent in the allegedly monopolized industries was that of coal, which stayed constant."