A Short Paragraph Full of Errors
By David Henderson
The great monopolies of that period — Rockefeller’s Standard Oil, the sugar trust, the financial and railroad interests — used their power to corrupt the economy and politics. Market power both reduces growth and increases inequality. Recognizing this, leaders put into place antitrust and worker protection laws.
This is from Eric Posner and Glen Weyl, “The Real Villain Behind Our New Gilded Age,” New York Times, May 1, 2018. It’s their short version of their book, forthcoming next week, Radical Markets: Uprooting Capitalism and Democracy for a Just Society. I’ve sent in my review to Regulation magazine and it will be published at the end of June.
On the issues in the paragraph above, Posner and Weyl are somewhat more careful in their book than in this op/ed, which is why I devoted my 2,500 words mainly to other issues, both strengths and weaknesses.
But let’s take a look at each sentence and evaluate.
The great monopolies of that period — Rockefeller’s Standard Oil, the sugar trust, the financial and railroad interests — used their power to corrupt the economy and politics.
First, were they monopolies? By and large, yes.
Second, did they use their power to corrupt the economy? No. They earned their monopolies by constantly finding ways to produce more cheaply, taking advantage of economies of scale. Among those who didn’t complain much, especially about Rockefeller, were the customers. See my “The Robber Barons: Neither Robbers nor Barons,” Econlib, March 4, 2013.
Here’s part of what I wrote about Rockefeller and Standard Oil:
But what is not speculative is how he expanded his market share. He did so by cutting prices and almost quadrupling sales. University of Chicago economics professor Lester Telser, in his 1987 book, A Theory of Efficient Cooperation and Competition, 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.” Some monopoly!
Third, did they use their power to corrupt politics? I don’t know. You can hardly expect the authors to give cites in a short New York Times piece to back up that claim. But you can expect them to do so in a 337-page book. They didn’t. What about the idea, pushed by Gabriel Kolko, that the railroads sought anti-competitive regulation? Robert L. Bradley Jr. and Roger Donway have nicely disposed of that one in “Gabriel Kolko’s “Political Capitalism”: Bad Theory, Bad History“>, Econlib, November 2, 2015.
Market power both reduces growth and increases inequality.
First, on growth. It depends on how the firm achieved market power. If the government granted the firm a monopoly, then, yes: in the typical case, real economic output will be lower than otherwise. But what if temporary market power is the reward for innovation. Then there will be an incentive to innovate and the effect is higher growth. Rockefeller innovated like crazy and the results were as noted above.
Second, on inequality. Yes, increased market power, all else equal, will increase economic inequality. But whereas the kind of market power that Lyndon Johnson and his wife got when he was a young Congressman (the FCC, as a favor, allowed them to buy a license in the lucrative Austin, Texas radio market, then gave a better place on the AM dial with longer hours, and finally kept out competitors) increased economic inequality, it made listeners and advertisers in the Austin radio market slightly worse off. When Rockefeller got market power, he did it the way Telser says above. Economic inequality increased, but consumers were better off.
Recognizing this, leaders put into place antitrust and worker protection laws.
I don’t know enough about worker protection laws. I do know a lot about antitrust laws. What does it tell you when some of the main people pushing for antitrust laws are competitors of the people (the trusts) that they want to use the laws against? It says that they expect the antitrust laws to make it easier for them to compete. How do you make it easier for them to compete? By causing the trusts to charge somewhat higher prices, not lower prices.
Another excerpt from my piece on robber barons:
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.
HT for noticing the NYT op/ed: Robert Hessen.