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.
READER COMMENTS
Airman Spry Shark
May 1 2018 at 3:39pm
The link for “Gabriel Kolko’s ‘Political Capitalism’: Bad Theory, Bad History” is broken; I think you want http://www.econlib.org/library/Columns/y2015/BradleyDonwayKolko.html
David R Henderson
May 1 2018 at 4:00pm
@Airman Spry Shark,
Thanks. Corrected.
John Goodman
May 1 2018 at 5:38pm
I think Bradley and Donway miss the larger point in discussing Kolko, as do you.
There is a large literature on the economics of regulation that pretty much confirms that the regulatory agencies in the 20th century tended to be cartel agents for the regulated industries. The ICC for the railroads and then the truckers. The CAB for the airlines. The FCC for the broadcasters. Etc.
They weren’t perfect cartel agents. But they favored producers more than consumers on the whole.
In some ways this is confirmed by deregulation. Who gained the most by that? The producers or consumers?
Alan Goldhammer
May 1 2018 at 5:39pm
David, remember that Senators were not publicly elected until the passage of the 17th Amendment and the first “public” election took place in 1914. Prior to that time they were picked by State legislatures and there was plenty of corruption going on, a lot of which was brought about by the various trusts. The railroad shenanigans are particularly interesting and one only need read Richard White’s splendid book, “Railroaded: The Transcontinentals and the Making of Modern America.” Where do you think the money for the institution where the Hoover Institution is located came from?
Rockefeller may have been a benevolent oligarch but one none the less. We will never know what he might have made of a single Standard Oil had it not been broken up.
MikeP
May 1 2018 at 6:50pm
Where do you think the money for the institution where the Hoover Institution is located came from?
Government handouts, of course.
But that is a damning observation about government power, not about market power.
…remember that Senators were not publicly elected until the passage of the 17th Amendment…
Indeed. And there were few Progressive Era “reforms” that were worse for the republic. It removed the hurdle to legislation of passing a non-popularly-elected house, making government more powerful in the end.
Jon Murphy
May 1 2018 at 8:13pm
Market power both reduces growth and increases inequality. Recognizing this, leaders put into place antitrust and worker protection laws.
If I recall my Thomas Leanord correctly (and I am going off memory here), worker protection laws weren’t put in place so much to protect workers from corporations but rather to protect white, male workers from minorities, immigrants, and women who were entering the workforce and lower prices. I think the “robber barons” were just seen as problematic in labor because they prefer these lower price workers.
Miguel Madeira
May 2 2018 at 6:03am
“It removed the hurdle to legislation of passing a non-popularly-elected house, making government more powerful in the end.”
This only makes sense if we assume that pro-government legislation is usually more popular than anti-government legislation.
MikeP
May 2 2018 at 7:55am
This only makes sense if we assume that pro-government legislation is usually more popular than anti-government legislation.
Whether or not it’s more popular, pro-government legislation happens more often.
“Anti-government legislation” is almost an oxymoron. Legislation is what governments do.
robc
May 2 2018 at 9:01am
The bigger problem with the direct election of senators is in broke one of the checks and balances in the design of the government.
The people provided a check on the House. The state governments provided a check on the Senate. We lost the latter for duplication of the former.
Unfunded mandates on state governments are much less likely to pass the Senate with Senators being chosen by the legislatures.
MikeP
May 2 2018 at 11:15am
The bigger problem with the direct election of senators is in broke one of the checks and balances in the design of the government.
Yes. That’s clearer than the way I put it.
David Viel
May 2 2018 at 1:08pm
The problem with the large corporations, cartels , and combines is that they held pricing power in the economy. This allowed them to set profits and wages as well, as they tuned the prices to maximize their monopoly rents. If the economy was booming this would not be such a problem as these companies would need to bid against other companies for workers, so workers could get a decent wage. But, during downturns, there is no bottom to the wages paid or unemployment overall, so people suffer greatly. This is why it was necessary for the federal government to put a variety of security programs in place.
See: http://canonicalthoughts.blogspot.com/2018/05/the-old-deal-strikes-back.html
David R Henderson
May 2 2018 at 3:57pm
@John Goodman,
I think Bradley and Donway miss the larger point in discussing Kolko, as do you.
Hmmm. The term “larger point” is tricky. In discussing Kolko, though, they’re dead on.
There is a large literature on the economics of regulation that pretty much confirms that the regulatory agencies in the 20th century tended to be cartel agents for the regulated industries. The ICC for the railroads and then the truckers. The CAB for the airlines. The FCC for the broadcasters. Etc.
Absolutely correct. Indeed, notice that I talked about the FCC in the post you’re commenting on. As you say, though, that was about the 20th century. Kolko’s claims were about the late 19th century.
They weren’t perfect cartel agents. But they favored producers more than consumers on the whole.
True also.
In some ways this is confirmed by deregulation. Who gained the most by that? The producers or consumers?
Consumers. No argument there.
David R Henderson
May 2 2018 at 4:00pm
@David Viel,
The problem with the large corporations, cartels , and combines is that they held pricing power in the economy. This allowed them to set profits and wages as well, as they tuned the prices to maximize their monopoly rents.
The evidence doesn’t support your claim. See the Robber Barons article by me that I referenced above.
Ron W
May 3 2018 at 1:08pm
Explain how schemes like the South Improvement Company benefited consumers.
David R Henderson
May 3 2018 at 2:07pm
@Ron W,
Explain how schemes like the South Improvement Company benefited consumers.
Reksulak and Shughart do so. I quoted them and linked to their piece in my Robber Barons article. I’m gathering that you didn’t read it. If you want the answer, do so.
Comments are closed.